Purchasing power of money

“ It scarcely occurs to any of them that he needs a knowledge as to gold; yet every bargain into which he enters depends for one of its two terms on gold. I cannot but believe that the diffusion among business men of the fuller knowledge of the equation of exchange, of the relation of money to deposits, of credit cycles and of interest, which the future is sure to bring, will pay rich returns in mitigating the evils of crises and depressions which now take them so often unawares. ”

“ The dealer, exchanging his perishable products for money, may keep its power of purchase locked in this form as long as he lists, putting an interval at his own pleasure between selling and buying, and with this generalized power in his pocket he may buy when he will and what he will and where he will. Money, too, makes any purchasing-power portable, divisible, and loanable. A man may carry the value of his farm in his purse, and may divide it up for a thousand different purchases, and especially is able to loan it in this form in order to receive it back again with interest at a future day. ”

“ But he may make purchases with money which he only expects to have, or even only pretends to expect. He may obtain goods in return for his acceptances payable at a future time, or on his note of hand, or on a simple book-credit—that is, on a mere promise to pay. All these purchases have exactly the same effect on price as if they were made with ready money. The amount of purchasing power which a person can exercise is composed of all the money in his possession or due to him, and of all his credit. ”

“ Running through the above statement of the independent doctrine of finance, we see that three ideas are most prominent. First, a desire that the government supersede avaricious man and blind nature in the creation and distribution of money, in order that money may be a stable purchasing power. Second, a determination that money shall no longer be a commodity to be bought, and sold, and manipulated, a leech upon labor in the hands of a few, but a convenience of trade, accessible to the many at first cost. ”

“ But as the currency changes in purchasing power, so the money value of all you possess, and all you have to buy or to sell, changes also; so that the power of the Government to determine the quantity of currency that shall be in circulation is virtually equivalent to the power, by its own arbitrary act, to increase or decrease the money value of all private property in the land; in other words, the private fortune of every citizen is placed at the mercy of the Government's arbitrary pleasure. ”

“ With higher interest, the value of land, railroads, and other durable capital will be lower because the value depends on future earnings or future services, and these are now discounted at a higher rate.*36 The borrower, in paying back an equal purchasing power over consumable goods and services, is paying back a much higher purchasing power over such things as land, houses, and factories—a much higher purchasing power over future income—than he borrowed. ”

“ But as somebody else must be found to take the money off his hands, its mere transfer will not diminish the amount in the community. It will simply increase somebody else's surplus. Everybody has money on his hands beyond what experience and convenience have shown to be necessary. Everybody will want to exchange this relatively useless extra money for goods, and the desire so to do must surely drive up the price of goods. No one can deny that the effect of every one's desiring to spend more money will be to raise prices. ”

“ With reference to Professor Laughlin's fourth proposition it may be said that no economist of standing claims that purchasing power is "identical with the quantity of the media of exchange in circulation." Effective purchasing power, however, [Pg 189] in our modern business communities, does depend upon the possession of money or of the right to demand money. ”

“ And this is, in the main, correct: because the purpose for which, in the ordinary course of affairs, money is borrowed, is to acquire a purchasing power over commodities. In an industrious and commercial country, the ulterior intention commonly is, to employ the commodities as capital: but even in the case of loans for unproductive consumption, as those of spendthrifts, or of the Government, the amount borrowed is taken from a previous accumulation, which would otherwise have been lent to carry on productive industry ”

“ In what kind of money will you prefer to receive the wages of your labor or the profits of your business—in a kind of money whose value or purchasing power is stable and can be depended upon to remain virtually the same from day to day, and from week to week, or in a kind of money whose value and purchasing power are fluctuating and uncertain, so that you do not know what it will buy from one end of the week or of the month to the other? Every sensible man who in the least understands his own interests will answer, instinctively: “Give us the first—the money of stable value ”

“ So long as the rank and file even of business men fail to realize that they are daily gambling in changes in the value of money, a fact of which they are blissfully unaware, they will exert no demand for preventing those changes. They are the parties whose interests are chiefly involved, and the first essential step in the reform process is that they shall be made to comprehend the benefits of a stable purchasing power.*53 Until this time arrives, any political proposals will be premature. ”

“ Then the lender really gains, since he can now get more of other goods in exchange for those it was his original purpose to use,—a course which he may now be tempted to take while otherwise he would not. To the borrower, however, the appreciation of the goods on the basis of which repayment is made, relatively to the goods he is engaged in producing, might be regarded as causing him loss. The same purchasing power over the goods, on the basis of which he is to make payment, means in such a case, a greater purchasing power over the goods he is engaged in producing. ”

“ Through banking, he who possesses wealth difficult to exchange can create a circulating medium. He has only to give to a bank his note—for which, of course, his property is liable—get in return the right to draw, and lo! his comparatively unexchangeable wealth becomes liquid currency. To put it crudely, banking is a device for coining into dollars land, stoves, and other wealth not otherwise generally exchangeable. ”

“ IV.6 It must be borne in mind that although business loans are made in the form of money, yet whenever a man borrows money, he does not do this in order to hoard the money, but to purchase goods with it. To all intents and purposes, therefore, when A borrows one hundred dollars from B in order to purchase, say, one hundred units of a given commodity at one dollar per unit, it may be said that B is virtually lending A one hundred units of that commodity. ”

“ A widow, or a trustee, or other long-time investor, would prefer to buy bonds which guaranteed a regular yearly purchasing power over subsistence, rather than those which merely promised a given sum of money of uncertain value. ”

“ He gets back no more control over present income, but he gets a purchasing power over a greater amount of deferred income. Had he invested in land at the start, instead of lending, the rise of interest would have left him with the same amount of land, but a less value. As it is, he gets back a purchasing power over a greater amount and the same value of land. An accident has made the lender better off than he expected, and better off than he would have been had he invested instead of loaning. ”

“ It is also of importance to a clear understanding of this subject to recognize at this point another fundamental fact, namely, that there is no evidence that any nation or people has ever adopted, in the first instance, any article or commodity to use as money which did not possess, by reason of some inherent or intrinsic desirable qualities, a natural purchasing power or value. ”

“ XI.59 When appreciation is anticipated, there is a tendency among owners of money to hoard or hold it back, and, among owners of goods, to sell them speedily; the result being to decrease prices by reducing the velocity of circulation and increasing the volume of trade. ”

“ For although the rate of interest in many such cases may be low, the capitalist is compensated for this by the enhancement in the purchasing power of each dollar of the principal and by the necessarily greater command it secures over the products of labor. ”

“ Still less surprising is it that in the face of a continually increasing value of money, or decreasing prices of nearly everything else, prudent men choose, as far as possible, to turn their capital into money, lock it up in safe deposit vaults, or let it lie idle in banks, rather than take the great risk that134 any active use of capital under such circumstances carries with it. When money is increasing in purchasing power from five to seven, and even a higher per cent. ”

“ Being based on contracts, the money terms of which during a given period must not be changed, they are not free to be influenced in the same ways as other property. The existence of such contracts constitutes one of the chief arguments for a system of currency such that the uncertainties of its purchasing power are a minimum. ”

“ VIII.54 It is clear that the equality between the money side and the goods side must be maintained somehow, and that if the prices are raised the quantity of money or the quantity of deposits or their velocities must be raised, or else the volume of business must be reduced. ”

“ He is compelled to pay, when prices have fallen, on the same basis in terms of money, and a much higher value in terms of goods, than when prices ranged higher. Hence failure often results, credit currency contracts still further because of the general distrust, and depression becomes more severe. With payment in terms of purchasing power, the situation would be altogether different. Falling prices would neither injure borrowers nor benefit lenders. ”

“ A constant but unperceived rise in the value of the dollar with which those payments must be made, baffles all plans, thwarts all calculation, and destroys all equities between debtor and creditor. If we can not intelligently regulate our money volume so as to maintain unchanging the value of the money unit, if we can not preserve our people from the blighting effects which an increase in the measuring power of the money unit entails upon all industry, to what purpose is our boasted civilization? ”

“ And as money, or currency, is the great, the indispensable instrumentality in the production and distribution of wealth; as it is the capital, the motive power, that sets all other instrumentalities in motion; as it is the one thing, without which all the other great agencies of production—such as science, skill, and machinery—are practically paralyzed; to say that we need no more of it, and shall have no more of it, than we now have, is to say that we need no more wealth, and shall have no more wealth, and no more equal or equitable distribution of wealth, than we now have. ”

“ There is therefore no ground for believing, as is so common, that the value of money is settled by different causes than those which affect the value of other commodities, or that the Bank of England has any despotism in that matter. It has the power of a large holder of money, and no more. ”

“ What a glorious time for enterprising contractors, what a seductive season for Congressmen to help a friend for a little share in the profits, what a carnival of fraud, what a flying about of stray millions! For, mind you, money will be no object; on the contrary, it must be spent, and the more spent the better, for the greenbacks must be got out, in obedience to the mandate, "to make and keep the volume of the currency equal to the wants of trade." ”

“ Mankind has been taught that in the essence of things fiscal your question of currency is as intricate and involved as was the labyrinth of Minos. And then, to add ill-doing to ill-teaching, our own crazy-patch system of finance has been in every one of its patches cut and basted and stitched with an interest of politics or of private gain to guide the shears and needle of what money-tailor was at work. ”

“ It is for this reason they are made to bear interest: and there can be no doubt, that every man will prefer a species of money which answers all the purposes of a currency, and even, when lying idle, brings in a profit to the possessor. The same consideration will prevent the lenders recalling the old paper, at the quarterly payments; because they hold a more valuable property instead of it. ”

“ Every voter in this Republic has a head above his shoulders supposed to contain a think-shop; and, if the “Power” now controlling our money volume, and as a result our “commerce and industries,” is to be removed and better times secured, every think-shop must get down to business, with a full determination to see that our “commerce and industries” shall not be interfered with, that the volume of money be increased enough to effect rapid exchange of products and the payment of debts. ”

“ This incessant fluctuation, in the intrinsick value of bank curreney, is at least more likely to favour cunning, knavish, calculating speculation, than simple, honest, thoughtless industry. Those who settle the carat of this currency, are buyers; upon what principle to be found in human nature by the grossest credulity, can they be possibly induced to use this power, for the purpose of enhancing the value of the commodities they buy? ”

“ Why is money not hidden and not sought for now? Because people have security for the employment of it, and by the employment of it in creating new produce the nation's stock of capital goes on hourly increasing. ”

“ Money, says the same commentator, is the universal medium or common standard by a comparison with which the value of all merchandise may be ascertained; and he also speaks of it as "a sign which represents the respective values of all other commodities." Such a power, that is the power to coin money, he adds, is one of the ordinary prerogatives of sovereignty, and is almost universally exercised in order to preserve a proper circulation of good coin, of a known value, in the home market. ”